Individual carbon budgets or quotas

April 2023

Association Escape Jobs pour l’Emploi sans Carbone (EJ)

Individual quotas or carbon budgets are based on an evaluation of the carbon content of all consumption.

Isn’t this a gas factory? Is it possible? Wouldn’t the risk of fraud compromise the whole system?

The evaluation of the ecological footprint of the products and services we purchase is inevitable in order to measure our responsibility, whatever the system chosen to ensure an annual reduction of the global footprint of society. This evaluation, expressed in «  equivalent tons of CO2 ", to take into account the main GHG, CO2, methane and nitrous oxide, is the responsibility of the final seller of goods and services. It is part of a general movement of obligation of vigilance and expansion of corporate accounting. This measure is no more difficult than the VAT measure. New techniques such as blockchains (distributed databases) further facilitate the traceability of exchanges between millions of actors.

Progress in the fight against climate change: a cleverly maintained illusion

For thirty years, we have been under the illusion that we are moving in the right direction: national wealth has increased and greenhouse gas emissions on French territory have decreased, a sign of greater efficiency in the use of energy, efficiency defined as the ratio between GDP and fossil fuel consumption on our territory.

This is an illusion, because most of these gains in energy efficiency come from the fact that we have relocated all the production that emits large amounts of greenhouse gases elsewhere in the world: in thirty years, our global ecological footprint per capita has not decreased; half of it is now made up of emissions outside our territory, even though, at the end of the day, the suppliers of the goods and services we consume are located on French territory. And every time we take tough measures to protect our environment, we are taking another step towards France’s loss of autonomy.

Counting the GHG content of our consumption : an imperative whatever the policy envisaged to reduce our ecological footprint

It is not the fact of allocating an annual carbon budget to households that obliges us to count the GHG emissions linked to our consumption, it is the will to assume our responsibility towards the planet ! Whatever the policy implemented, if we want to put an end to the current hypocrisy, we will have to do so. On the one hand to measure our global footprint wherever the emissions are located, on the other hand to avoid that all production is transferred to countries less concerned about preserving the planet. This is so true that for years the European Union has been trying to make the conditions of competition more equitable by taxing at the border the products that enter the EU and that come from sectors that emit large quantities of GHGs, such as cement, steel and fossil fuel extraction. But it cannot really do this because it wants to act through a tax, which is contrary to the rules of the World Trade Organization (WTO) and therefore vulnerable to retaliatory measures. This is what forces it to contort itself and to tax only certain products and not others.

The result is that Turkish steel will be taxed at the border, but not cars made in Morocco with Turkish steel. This is to encourage a further acceleration of the deindustrialization of Europe, with the active complicity of European companies themselves! And the new American plan to relocate the economy to its territory will further aggravate the situation. So much so that the Commission was led to adopt, at the beginning of 2023, within the framework of the Green Deal 1 (EU Green Deal), exceptional subsidies granted to companies specializing in the production of batteries, solar panels, wind turbines, heat pumps, electrolyzers and technologies for the capture, use and storage of carbon dioxide and the extraction of the critical raw materials associated with them.

The main criterion for awarding these subsidies is the risk of relocation of the industry in question. But this only solves a small part of the problem.

It is the taking into account of the « carbon content » of all goods imported into Europe that will answer the problem, without any taxation. This is the dilemma to which the individual carbon budget provides a solution: this carbon content must be charged to importing companies or customers as a physical quantity.

What should be counted ?

Attention has long focused on carbon dioxide, CO2, the most visible and widespread greenhouse gas, the one emitted by our cars and boilers. But two other GHGs have a significant effect on the climate: methane, NH4, and nitrous oxide, N2O. Less present in the atmosphere, degrading more quickly (methane) or less (nitrous oxide), they have a more intense greenhouse effect and cannot be ignored; they account for 5 to 10% of global warming.

This raises two questions: what equivalent should we adopt so that at the end of the day we have a « CO2 equivalent » content of our consumption ? And how to measure these emissions, some of which are very diffuse because they are linked to agricultural practices?

Equivalence rules have been set at the international level, which allows us to speak of the « carbon content » of our consumption, this content integrating the two other main GHGs.

It is a matter of debate when a study published by The Guardian2 reveals that 1000 avoidable sources of methane in the world generate 0.39 Gt CO

The nature of agricultural practices responsible for emissions is fairly well known. As for emissions that are not linked to final consumption, such as natural fermentation in lakes, these do not have to be taken into account, whereas the same methane production in rice fields is caused by human activity, such as deforestation, which generates 10% of the planet’s carbon footprint according to the Global Carbon Project3.

An effort that is part of the broader requirement of corporate responsibility

Counting the carbon content of goods and services sold by companies is part of a broader movement leading to a fairer definition of corporate responsibility.

Accounting laws and rules are still evolving slowly.

Those that currently govern us are inherited from past centuries.

It has been necessary for several decades to undertake a profound revision of these rules. Two main currents combine :

  1. a broader definition of the responsibility of « ordering » companies : they can no longer consider that everything that happens outside their own legal perimeter does not concern them, that they limit themselves to purchasing goods and services from suppliers who are legally independent of them and that they have nothing to know about the conditions of their production.

The French law, soon to be the European legislation, known as the « duty of vigilance », obliges them to know how what they buy was produced; their responsibility is engaged. This is the result of the « Rana Plazza » scandal, of the collapse of a garment factory in Bangladesh, which buried thousands of workers under the rubble, and of the labels of major European garment brands that presented themselves as models of social responsibility because their headquarters had undergone thermal insulation work…

The duty of traceability of carbon content is the logical extension of this duty of vigilance. Even if these legislations are still imperfect, they are taken seriously enough by companies or financial institutions to lead them to recruit « compliance officers » in charge of ensuring that the company complies with the rules; if it does not, the reputational risk is much higher than the risk of financial or even criminal sanctions.

Thus, carbon traceability is not a « gas factory » resulting from the idea of an individual carbon budget but the result of a fundamental movement that goes beyond climate protection.

Can we be satisfied with average values for the carbon content of a sector?

Today, there is no obligation to trace the carbon content of products in a sector. And yet, if only to evaluate France’s overall ecological footprint, we must have some idea.

And more and more frequently, newspapers and websites suggest that you evaluate your own « ecological footprint »: a plane trip from Paris to New York, a pair of jeans, a car trip, a computer, a steak, your e-mails, your streaming subscription, etc., trying to account for all the costs.

For example, a car trip will not only count the liters of gasoline but also the ecological footprint of the car’s manufacture spread over all the kilometers it will travel. Where do these numbers come from ? From the ecological footprint of that particular pair of jeans, that particular car ? No, they are averages determined in France by the CITEPA and the ADEME from the exchange matrices between economic branches.

Can we be satisfied with this? To get an initial idea of the impact of one’s lifestyle, yes  To manage individual carbon budgets tomorrow, certainly not !

It is like saying «  the average amount of pesticides for a given fruit is the division between the number of tons of fruit and the number of tons of pesticides, and it is this average that tells you the effect of eating fruit on your health « . However, organic agriculture guarantees that it does not contain any pesticides and must undergo numerous controls to avoid fraud. This is what justifies the higher price in your eyes.

The power of the carbon budget is precisely to direct consumers towards products and services with the lowest GHG emissions: better optimized production processes, use of recycled raw materials and renewable energy sources, quality that increases the product’s lifespan, slow fashion versus fast fashion, use of second-hand products, repair rather than replacement, service rather than material goods (economy of functionality), etc.

In order to favor the most virtuous channels, it is therefore necessary to be able to identify them and, as in the case of pesticides, it is the actual carbon content that must be evaluated.

How to calculate the carbon content of a product?

We have a precedent, that of VAT, which allows us to follow the construction of added value throughout the value chain. It is not because this tracking was easy that we created the VAT, but because we created the VAT that this tracking became natural.

And VAT, a French invention, was quickly adopted by almost all countries in the world. When intermediate goods come from outside the EU, they are invoiced tax-free and the importer pays the full VAT at customs.

However, it is easier to ask each supplier to show the fossil energy consumed on his invoice than to calculate his added value. As for methane and nitrous oxide emissions, it is easy for concentrated industrial emissions, such as methane emissions from oil and gas operations, and a little more complex for agricultural or household emissions, but the equivalences are known.

It is in the interest of each producer to give an exact value because it is the « carbon units » paid by his customers that allow him to continue his activity. An over-valuation could jeopardize the sale, an under-valuation could compromise the continuation of the activity. The result will be a « carbon register », a simplified accounting system for companies allowing to verify the equality of the carbon content sold and purchased by the company.

The problem is a little more complex with intermediate goods coming from outside the company because external suppliers are not subject to the same constraints of balancing their own carbon account and may be tempted to underestimate the carbon content of their production, which is itself the result of a more or less long chain of actors. In this case, it is necessary to use the customs nomenclature that qualifies the physical quantities of imported products: it is easy to add the « unit carbon content » field.

An importer who does not declare the carbon imported would be treated according to the practice of the « lost highway ticket »: the motorist who loses his ticket is charged the maximum. Here, either the importer can prove that the carbon record he keeps is genuine and complete, or he is charged double the average carbon points for the industry. The new techniques here are a great help, for example blockchains that can record all transactions in an unfalsifiable way without a lot of staff.

Aren’t we at risk of massive carbon fraud?

The issue of fraud is common to all taxes, including VAT, to all schemes such as carbon credit trading at the European level and to all labels, such as the organic farming label for imported products. It is posed in the same terms for carbon content and will find comparable responses : certification of transaction recording systems, episodic controls by certified bodies as in the case of labels, and sanctions such as an increase in the carbon units collected at the border. One of the major risks for companies that resort to fraud is the reputational risk. The existence of average values for a given commodity chain will give such a comparative advantage to companies that can demonstrate that the carbon content of their imports is significantly lower than this average that they will quickly see their advantage in setting up a system for recording all transactions.

As carbon budgets are based on current emissions in the first year, the interest in fraud will be limited in the first years, giving the system time to mature.

Should we charge the carbon content associated with each particular product?

Any company is free to set the selling prices of its various products by allocating overheads or production costs among them as it sees fit, its only constraint being to balance its accounts. The logic is the same for the allocation of carbon units between the different products, the only requirement being that the carbon units allocated to the products balance the carbon units needed for production.

Here again, the constraint will be different for imported products for which it would be easy to allocate, for example, renewable energy to products entering Europe and fossil energy to products destined for countries that have not yet set up individual carbon budgets. For these products, importers will necessarily have to take into account the average.

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